Jefferies Upgrades Finisar To Hold, Says Risks Remain

By Teresa Rivas

Shares of Finisar Corp. (FNSR) bucked the broader market’s selloff, rising more than 1% after Jefferies upgraded the fiber optic and network performance systems maker from Underperform from Hold.

Analyst James Kisner and his team cited strong Data Center spending on 10G and 40G optics over the medium-term and a likely six-month window before a significant commercial impact ramp of silicon photonics (which they see as a pricing and market share risk for Finisar).

“Our checks suggest 10G and 40G are likely to continue to grow quite robustly through 2014 as optical continues to take share from copper in data centers and enterprise LANs as speeds increase from 1G to 10G,” he writes, noting that most of the danger to these products from photonics technology won’t hit until 2015.

Nonetheless, Kinser writes that he would need to see 10G and 40A adoption run ahead of his current estimates—or a delay in the commercialization of silicon photonics—to turn more constructive on the stock. He writes he could also turn more bearish “if it became apparent silicon photonics commercialization was accelerating and we could verify that Finisar’s business was likely to be impacted imminently.”

His $22.50 price target is based on a p/e of 14 times, “which we believes balances near-term growth prospects and technological risk. We also performed a DCF analysis with projections through 2020 on 3 scenarios (Bear, Moderately Bullish, Ultra Bullish) arriving at valuations of roughly $16.00, $22.00, and $29.00, respectively.”

Last month the company got a boost from its upbeat first-quarter earnings report and guidance.

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